Haemonetics Corporation (HAE) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Jefferies First Annual Global Plasma Summit. Up next, we have Haemonetics. With us, we have Chris Simon, the company's CEO. We have a half hour allotted here, and we're going to have a fireside chat discussion. And so Chris, thank you for joining us today, and we hope you're doing well.

Thank you, Anthony. It's a pleasure to be here. Wish you well as well.

I think a good place to start. Of course, we had a morning session with Matt Hotchko from MRB. It's just sort of a bit of a post-mortem over the past year, where we've been through COVID as it relates to plasma collection cycles and sort of where we sit at the moment coming up to mid-March, the 1-year anniversary of the pandemic coming in?

Yes, Anthony, it's a year unlike any other for sure. We think about it kind of in 3 broad horizons. It was the early period characterized by lockdown. And obviously, that was incredibly disruptive and challenging on all dimensions. And plasma collection was not, in any way, spared from that. So very difficult window, and we learned a lot about safety and access and response therein. I think there's a second horizon, which, in some ways, we are still grappling with, which is post-lockdown, free vaccine. And that, as we knew from the outset, wouldn't be a linear recovery. There's just too many cross currents, and I'm sure we'll get into the details around that. We think about it in 3 broad categories. What's going on with the centers themselves? Are they safe? Are they accessible? Do they have the capacity to collect? There's a second piece, which has to do with donor economics. What's -- what are the challenges they're feeling and seeing in their areas? And how do they respond? It's a combination of the recessionary pressures with any offset from stimulus, et cetera. And then I think we're entering into this post-vaccine period, where obviously, the pandemic, it's brought into control. And then we look at the response that the collectors are putting forth and what are they doing to promote and encourage return to essentially re-recruit their donors and make up for much depleted inventory reserves that are necessary in order to get the industry back in a position to meet demand, which continues on a beta in the end markets.

Lots of unraveling there but it's a good sort of setup over the past 12 months and where we are currently. The most recent development, of course, I believe, signing into one momentarily. Next few days, $1.9 trillion stimulus package, prior rounds of stimulus in the COVID cycle have had unique impacts on the plasma collection space. And so maybe just a little bit on your views on stimulus this round? And maybe the near-term effects of this as it comes through?

Sure. Stimulus will have a market effect on collections, for sure, and we saw that early. Certainly, that was the case with the earlier rounds of stimulus. There are many similarities between the plan that will be signed into middle of this week from what was offered back in April of last year, and we've studied that closely. There are positives. And if I go back to those -- the 3 dimensions of this, right, from safety and accessibility, I think we are in an outstanding place. The industry has responded quite thoughtfully and there's even some elements of the stimulus package that will help further advance that beyond just rolling out the vaccine more broadly, but testing, tracing, et cetera. So as we see public transportation and opening of foot traffic and transport across the border, full resumption of in student -- in class student participation at the college level, these things all bode well. But what we're left with is this middle bucket as we think about it around donor economics. And stimulus does tend to reduce some of the pressure and some of the motivation to donate. The center will be open, they'll be safe and accessible, but the economics of stimulus or a headwind to that challenge, so we just need to be thoughtful about that. And it comes to the third category, what is the collectors response, and how do they manage through that?

When you mentioned some of the factors that are impacting outside of stimulus sort of center access or willingness to -- amongst the donor base to want to come in and donate. When you think about some of those, you mentioned that some of those drivers have been easing, so mass transit travel, border restrictions, and then at some point, social distancing requirements at centers. As vaccines are more widely rolled out, how much of a step function on those headwinds are you expecting in the way of reversing? And so in the middle part of the year, would you expect an inflection?

Yes. Well, look, if we look at what was our fiscal third quarter, which began in October. We essentially experienced a full 10 weeks of recovery. And what we look to is some metric of donor economics, the interplay between recessionary pressures and the stimulus. What we saw was a meaningful reduction in income and household savings rates, particularly amongst the donor population. That created a strong demand, and we saw that increase in foot traffic into the centers. And so it gave us a lot of confidence that there are no structural changes here, right? The end market demand for IG remains quite robust. And the basic dynamics of collection pulled through. So we had a very robust third quarter as a result. Now new stimulus late in December, we saw all the early effects of that in January and beyond, and we continue to contend with that. So I think we're going to see more of that here in the near to intermediate term, but it really just sets the stage for an even more robust recovery when it comes. And I think your time horizon is right. We'll see this begin to improve through the summer, and just gain momentum from there, obviously, having a properly vaccinated and kind of managed population is a good thing for the safety of this. And the demand is there. So I suspect as they have fractionators that run the collection centers, we'll continue to do everything they can do to make sure this is safe and available and properly compensated.

And when you think about the recovery in this space and a return to the long run average, which you have long commented as has the industry, others in the space, that 8% to 10% range, how do you think the shape of the recovery is going to play out? Certainly, there's a catch-up phase as we sort of immediately exit the sort of vaccine rollout stage, and then that returned to 8% to 10%. So how do you think about the immediate post-recovery trend as it relates to growth rates? And then the path back to the 8% to 10% average growth trend?

Yes. Look, it's difficult to call the likely inflection point because of the interplay between the individual donor economics, the factors we've been talking about here right now, but also of what the collectors are willing to do in response. They've ramped up promotion. They have increased donor fees and looking at how that plays out over time, I think longer term, it's easier to call. But we now know really over the prior 3 years before 2020, we were, as an industry, over-collecting, which is intelligent and thoughtful and exactly what you would want in an industry that's so vital to patient care to do. We had years where we were collecting in the mid-teens and above. An individual company, customers of ours were pushing the upper envelopes of that. They've now worked through those inventories. And I think the wildcard in calling the trajectory of the recovery, which we expect will be quite robust, and I think the wildcard there is just how depleted the inventory levels are. And it -- there's an aggregate across the industry, which matters, but it also matters at the individual company level because they're an individual company that's facing into the real threat of potential stock out will take more direct actions, and that has an knock-on effect in the industry. If they, for example, become more aggressive about the promotional tactics about their remuneration rates, you'll see that have a ripple effect because they compete with other centers in their same town, et cetera, and it resets the base. We've seen some of that. It's likely that we'll see more of that if the collections recovery is delayed in any way by the current stimulus.

Outside of new technology, and we'll hop into that in a moment. But Matt spoke about this a bit on the morning session, that whole sort of initiative by collectors to drive donation volumes, marketing and software were 2 initiatives, in particular, that he referenced. And so how is Haemonetics really partnering with its collection customers? Again, outside of technology, we'll hop on that in a second, in sort of facilitating the return back to normal on the donor volume side?

Yes. So we had extensive conversation with all of our customers as we headed into pandemic lockdown periods, et cetera. I'm incredibly proud of our team -- our internal team at Haemonetics because essentially, we didn't miss a beat. All of our plants stayed fully operational. We're not immune to the challenges of the pandemic. We had folks get sick, et cetera, but we were never hit by an isolated spreader event that was local to us. So while we unfortunately had a battle through the same challenges of the environments we operate in, we are able to do so without ever missing a production schedule or missing a shipment. So we've stayed fully operational. Obviously, we've built inventories where we could and feel quite good about that and how that positions us for recovery. We made a point early on of accelerating some software development. We have something that we referred to as the COVID 360 app, which essentially we rolled out at no cost to the industry for the early phase of this, just so that they could use it. Plug it in with their Nextlink DMS, for example, and basically able to process donors remotely, right? So if they're practicing as they all are social distancing, you can check in from home, update your medical profile, get prequalified for your collection, your biometrics, et cetera. You can queue up virtually, either by remaining outside the center, in the parking lot, and then process accordingly. It's what you've seen in other industries as well, but it was great to be a part of that and help roll that out across the industry. It definitely expedited things. It's also encouraged centers to move to more of a scheduled environment where they're setting up appointments for collections, which has a two-fold benefit, right? It regulates the flow-through the center for safety purposes, but it also creates more of a commitment amongst the donor population, in terms of turning up for their appointments, et cetera. So we've seen multiple benefits there. It's been a fun part of it. It's -- when we talk about our thrust into software, software as a service, data analytics, digitization of the collection process. This is an opportunity to roll some of that ahead of the curve.

That's helpful. And a topic we also discussed earlier today was the notion of China and Europe really becoming a little bit more independent as it relates to source plasma collections. So some interesting data points from the morning session. High-level views on China and Europe as it relates to building out their own networks?

Yes. So Europe is a relatively modest portion of our worldwide source plasma collection, less than 10% now. But by comparison, the European markets have fared better post the initial lockdown period. And we've had meaningful ongoing collection volume recovery throughout each of the markets in Europe, where we represented. So that's been exciting and more modest, of course, but a source of strength. In parallel, it's been a pretty heavy dialogue around source plasma, self-sufficiency on the plasma front. Some of that was aided by convalescent plasma and the hypothesis that there could be a role for the treatment of virus more directly. While that hasn't played out, it has helped elevate the discussion. And hopefully, the industry can advance that dialogue and take it further. I think there will be opportunities to expand beyond the 4 countries like in Europe that currently allow for remuneration and higher levels of remuneration, which will be useful to improve the relative productivity. So that's exciting. The average person didn't know what plasma was per se. I think it's featured much more prominently as a result of the pandemic. So hopefully, we and others can do our part to help build that momentum. China is a bit of a different story. We operate 3 businesses. 2 of our 3 businesses are very well-represented in China. It's a source of strength for us, particularly growth, going forward. We don't have our plasma apheresis business established in China. The company vacated that market over a decade ago. We are actively looking at the possibility of reentering China because we see what your panelists see, which is 1.3 billion Chinese. There's the world's largest albumin market by far, a margin. Several of our largest customers, over the last 3 years, have made meaningful capital expenditures through acquisition or build out to bolster their presence there. As the relations between the country's returns to some more normalcy, if we see the right opportunities, we'll be excited to bring our technology to the market.

That's very helpful. Maybe we segue into technology on the platform side. And so obviously, Nexus, we're still in the midst of that cycle. Before we jump into particulars, maybe we could spend just a moment to recap and refresh everyone in the audience, the benefit of Nexus, what the leapfrog has been with that technology? And an update on the real-world experience from those that have adopted thus far?

Yes. Thanks for the question, Anthony. We think about the Nexus platform really for dimensions to it. There is the device itself, which is at the absolute core. There is the associated software, the DMS software donor management system software, that companies that -- there's the disposable kit, which is the primary source of our revenue, which consists of plastics that go along for an individual collection. And then there's the associated tech service support and data and analytics that come with it. So we are rolling out the NexLynk device is the core of that platform. We've also introduced and have rapidly gained share with our NexLynk DMS software. The kit has remained unchanged. That was a conscious decision. It's the kit that the industry knows and trust. It's responsible for 80% of the source plasma collection worldwide. And we felt it was important basis, stability for us. And then we meaningfully advancing our service offering. So at this point, when we think about the benefit of adopting the device with the software complement, it's meaningful yield improvement. It's a faster cycle time. We can shorten the duration of a collection, not just speed up the time, needle in, needle out, which we can do, but also the door-to-door time, which is what really matters to donor, it's a faster processing. Today, it's a 30- or 35- to 40-minute donation, but it takes 2 hours to make that contribution, particularly as you're thinking about the COVID recovery and how to expedite processing through the center. If we can shave valuable time before and after the collection, it just improves productivity that much more. The entire system is paperless so we drive compliance and the ability to validate and demonstrate that compliance in very powerful ways that have been endorsed by our customers and used with their conversations with FDA. And then probably the most important aspect is it's more satisfying for donors. It's just a better donor experience, and we have a growing body of evidence to support that.

When you think about a lot of value creation features within there, I believe, about 25% of your installed base has converted. So, a, is that a fair estimate in terms of the conversion? And then amongst those that have converted on the yield side, in particular, are they still seeing that sort of 23 ml-benefit per collection?

Yes. We've placed now over 6,000 devices that represents roughly 25% of our U.S. installed base. And the device is, in every way, meeting or exceeding our expectations. We can install it without disruption in the center. And we've demonstrated that, obviously, in a bunch of environments, including during the pandemic. The yield, exactly as you described it, right? It's a change in the application of the existing nomogram, right? There's always 2 methodologies. We've converted to the more sophisticated, the 2. That drives, on average, 23 additional milliliters. In some cases, as high as 30 or on the other end on the teens, but the average, based on the profile of the U.S. donor population, is 23.1 milliliters. And we have a very strong body of evidence against that. We've also spent up about 20% faster processing. So if you think about a collection center that historically, was running at a 5 collection per device per day, we're now running at 6 to 7 collections per device per day. And that's a meaningful speed up. There's a bunch of factors associated with that. E-compliance, we've essentially made them 100% compliant. The centers were highly compliant before. The difference is now we can demonstrate that electronically through electronic records. And then my point around the donor satisfaction, which we think, over time, will increase both a frequency with which donors come into the center. Roll out the donate twice a week in the U.S. based on legislative protocol. We think we'll get closer to that upper end of the aspiration. They also will stay active for a longer period of time. The average donor cycles through a center over a 4- or 6-month period until they go dormant. We think, as part of the recovery, as centers do their part to re-recruit donors, we have the potential with Nexus to increase the tenure and the frequency together.

A number of drivers in there, certainly, speed, yields, donor retention. On your last earnings call, you mentioned at some capacity, each of your global plasma customers now engaging with Haemonetics on adoption discussions. And so maybe can you speak about that a bit in more detail on how you see the adoption curve playing out from here?

Yes. We fully expect that the Nexus platform will supplant the PCS2 as the standard of collections, not just in the U.S. but worldwide. What we communicated in our last earnings call is, at this point, because we get a lot of questions. We don't talk about individual customers for obvious reasons. But we get a lot of questions about who's adopted? Where are they in the adoption curve? And what we communicated was that, particularly over the last quarter, there's been meaningful progress such that all of our customers have agreed to adopt NexSys somewhere in their network. We were clear what that wasn't, right? So that's not globally, 100 share, et cetera, et cetera. It may be that they've agreed to use it in Europe. It may be that they agreed to use it globally. They may or may not be turning on the full set of capabilities, yes and/or persona. They may be using base NexSys, conducting their own trial work around the yields, et cetera. But the reason we're enthusiastic within that is previously and throughout device is its own best sales aid. Anybody who agreed to use NexSys, at any scale, has been excited enough by the experience to adopt it full on because the performance is, as I was just describing. So from our vantage point, we think that solidifies the positioning of this being a matter of time. And we've said throughout that we will work with our customers based on their important and complicated set of priorities. NexSys can be part of that, but it won't be the only part of it. We, obviously, want to be there for them as they need us in the market.

When you think about the totality of value creation that NexSys, and even the full suite of products over time can bring, certainly, there is an abundance of value creation that can be split between the customers as well as Haemonetics. Obviously, pricing specifically, we can't go into detail, but sort of how do you think about value retention for Haemonetics as the cycle plays out?

Yes, as a corporation, we've made the improvement of our margins, both gross and operating income margins, a priority. When I joined the company 5 years ago, the company's operating income margin was in the very low teens, actually probably 12.5% to 13%. Even through the pandemic, as we reported this last quarter, our operating income margin is above 20%. And we think we can make that much more of an improvement going forward. We need to, in order to be sustainable and to fund the innovation agenda that we aspire to continue to lead the industry. From our vantage point, we think about ourselves as a cost of goods sold to our plasma fractionation customers. Prior to the pandemic, cost to collect a liter of plasma is approximately $150. That's meaningfully increased. We think some of those increases will be structural in nature and permanent. It's not unreasonable to think about the revised cost per liter at closer to $180, right? So when we think about that, we are well less than 10% of that cost of goods sold. However, we have the ability to influence all of that from our vantage point. So if we can make meaningful improvements, right, if we are seeing yield improvements of 10% to 12% in aggregate, if we are seeing cycle time improvements of 10% to 20%, and all day softer benefits associated with the compliance and the donor retention, this has the potential to be extremely powerful. And that gives us an ability to be a great partner to the industry without charging excessive rates of return in order to fund our innovation and growth going forward. So we're excited about the value proposition. We talked about it pretty much exclusively in those terms around cost per liter, and we think we have the ability to do meaningful benefit to the industry as a result of the brand.

One of those areas of innovation and excitement is certainly the Persona nomogram. So maybe a moment on how the company really developed that solution? A little bit of background on the innovation behind that and a recap of the benefits that Persona can bring?

Sure. We are extremely excited about Persona. I have described it publicly as a game changer. We think it is. It is completely a function of the information provided by the NexSys system. We knew early on that we could work with a more sophisticated nomogram. That was the first 23 milliliters. We talked about earlier on this conversation by using the existing nomogram in a different way. But then as we were collecting that data and challenging ourselves to look carefully at this and help the industry with its primary mandate to increase collection volumes even before the pandemic, what we came back with was a more personalized form of collection, whereby we would use the donor's individual height and weight and their hematocrit through a formula to identify exactly how much plasma they had available in the body. Take a set percentage, which was not the case with the existing nomogram that was put forth in the early '90s. There's good reasons for it. It's very simple to apply. But with the technology, we can be a tad more sophisticated and still managed for 100% compliance. So what we've done now is we take a constant percentage of plasma from the donor that's available, the net effect of that is we collect less plasma from a small portion of the population, that we would have collected more previously. But we collect more from a much larger portion of the population, and the aggregate benefit of that, for somebody who was using a PCS2, is about 93 or 94 milliliters of plasma. We're talking about taking the average collection volume from 750 or 775 milliliters up to a number that's in the mid-850-plus range. So very powerful, very safe and just a better way to use the available data and analytics to optimize collections.

A little bit on the discussions with customers. We've heard a lot of intrigue, a lot of interest around Persona. So a little bit on discussions there. When you think about, again, moving the totality of value creation and expanding that for the industry, industry-wide, how does that again translate to Haemonetics?

Yes. A lot of excitement around the increased collection capacity. Yield is first amongst the benefits across NexSys system, for sure. And I think the Persona application, with its safety profile and its increased yield, is really exciting. So that's certainly taken the discussions to a different level. Now for good reason, this is a risk averse, change averse industry, and customers have their own challenges associated with handling a bottle that is 1/3 larger by necessity. There are obviously kind of ongoing studies associated with this measuring protein concentration, the IG, is it the same plasma, same quality? We're very confident that we will clear all those hurdles, but customers understandably want to validate that. So we're in the process of doing so, and that will be a factor in terms of the pace of adoption. But from our vantage point, it bodes well.

And then the last one, we have a moment left, would be what's next on the agenda on the innovation front for Haemonetics? What should we be expecting in the next?

Yes. I think we are committed to our innovation agenda. We want to lead from a position of technological advancement. We will continue to challenge ourselves to innovate every aspect of the platform. We can now further improve the device. Our NexLynk DMS software is a very powerful tool to help centers run more effectively. We'll continue to advance the state of play there. We're going to challenge ourselves to improve the core disposables that are used in the device. And then I think we've only been on the scratch the surface of the application of data and analytics to improve our service and technical support offerings.

With that, Chris, we are just about down to the bottom of the half hour. We wish you and the team at Haemonetics well. Please stay healthy. And we look forward to eventually perhaps seeing you in person in the near future.

Yes. We'd all look forward to that, Anthony. Thanks again. Stay safe. Thanks for the time.

Thank you.